What's inside Joe Hockey's head?

Ross Gittins

Do you like paying tax? No, I thought not. Well, I have good news. The harsh measures in last week’s budget were directed towards one overwhelming objective: getting the budget back into surplus without increasing taxes to do it. Indeed, Joe Hockey is working towards the day when he can start cutting income tax.

If you hadn’t quite realised that, you could be forgiven. You’ve been unable to see it because of two distractors: the deficit levy and the resumed indexation of fuel excise.

But the levy is just a temporary pin-prick to the top 3 per cent of taxpayers who will pay it. And the price of petrol will rise by only about 1 cent a litre per year. The effect of the excise increase will be dwarfed by the ups and downs in the world price of oil.

The catch is this: you may hate paying tax, but don’t be too sure Hockey’s efforts to avoid tax increases and eventually make room for income-tax cuts will leave you ahead on the deal.

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Why not? Because to avoid increasing taxes - and avoid cutting the big tax breaks some people enjoy - Hockey has concentrated on cutting back all manner of government spending. And most people - maybe all families bar the top 10 per cent or so - have more to lose from cuts to government spending made, than they have to gain from tax increases avoided.

That’s particularly true when Hockey’s efforts to cut government spending take the form of tightening means tests, moving to meaner rates of indexation and introducing or increasing user charges.

Don’t think just because you voted for the Coalition Hockey is looking after you. It works out that low income-earners – generally the old, the young and the unemployed - are heavily dependent on government spending, and genuinely middle income-earners with dependent kids are significantly reliant on government spending.

Only high income-earners who’ve already been means-tested out of eligibility for most programs (e.g. me) have little to lose from Hockey’s cuts. That’s the reason for the deficit levy. Without it, it would have been too easily seen that high income-earners weren’t doing any of Hockey’s "heavy lifting".

Indeed, too many people might have twigged that the whole exercise was designed to have high income-earners as its chief beneficiaries. The spending cuts are permanent and many of them save more as each year passes. But the deficit tax is temporary.

Hockey wants us to believe he had no choice but to do what he did. I accept he had to get on with bringing the two sides of his budget back into balance, but he had a lot of choice in the measures he took to bring that about.

He chose to focus on cutting three big classes of government spending: health, education, and income-support programs (pensions, the dole and family tax benefits). Not by chance, these are the programs of least importance to high income-earners.

And while slashing away at health, education and income support, he was also busy abolishing the carbon tax, the mining tax paid largely by three huge foreign mining companies, cutting the rate of company tax by 1.5 percentage points and exempting federal grants to private schools from his education cuts.

Hockey will tell you his net cuts to health, schools and age pensions don’t actually take effect until 2017, after the 2016 election. This is the basis for his claim not to have broken Abbott’s election promises. (Remember, all the proceeds from his cuts and charges in health care will go into the new medical research future fund.) It’s largely true - though only for Abbott’s “core” promises.

Even so, Hockey’s most objectionable changes are the punitive treatment of the young jobless and the attack on Medicare’s principle of universality. The measures that will do most harm to the Liberal heartland (including the children of high income-earners) are the changes to HECS and deregulation of university fees.

Some people are referring to Hockey’s $7 patient co-payment for GP visits, tests and scans as a tax. This is quite wrong. It’s precisely because it isn’t a tax that it has been introduced. It’s a user charge: use the service, pay the charge. By contrast, taxes are amounts you pay the government that bear no direct relationship to what you get back.

High income-earners want more user-charging (for pharmaceuticals as well as GP visits) because they’re no great burden to the highly paid, but they reduce the need for higher taxes. They reduce the cross-subsidy from the rich to the poor.

I must warn you, however, of the one glaring exception to high income-earners’ insistence that tax increases be avoided at all cost (to other people). The one tax increase they lust after is a rise in the goods and services tax.

Why? Because they believe it will be part of a deal in which the higher GST paid by everyone is used to pay for another cut in the rate of company tax plus a cut in the top rate of income tax.

Ross Gittins is economics editor.

803 comments

I appreciate you telling it how it is Ross. I know many ordinary working people (guess that makes me one of them?) They will suffer and are already extremely worried, and will vote this Government out at the next election. I think the Libs will be out for 20 years this time and I cannot believe I voted for them for the first and clearly, last time.

Commenter

Chazza

Location

Sydney

Date and time

May 21, 2014, 5:35AM

If you think the ALP will be in for the next 20 years,then good luck with that. Just look at the economic difficulties Hockey has been bequeathed by Labor and think if you want more years of chaos, poorly implemented policy and half-baked solutions leading to the loss of human life. Unfortunately it seems Australians don't realise we are living on borrowed money and sooner or later the lender will come a-calling. Sooner or later someone has to get Australia ba k on track and I doubt it will be the ALP. Still dream on that all will be well when Abbott is kicked out by voters who put self interest first, last nd every stop in between. But just ask yourself why most economists think Hockey is right.

Commenter

Ian

Location

Fremantle

Date and time

May 21, 2014, 6:05AM

Well Chazza, I only voted for Libs when Kennett lost. I might vote for them next time though because, currently our Welfare bill is $130Billion. 80% of what they collect on personal income tax. Under the previous Govt, it rose from $80Billion. If we have a Govt. that borrows to pay for this, Australia will become a banana republic.

Commenter

Kingstondude

Location

Melbourne

Date and time

May 21, 2014, 6:12AM

Economic difficulties chuzza? Lowest debt to GDP ratio ever, 4th lowest taxing country in the OECD, 4th lowest level of government spending in the OECD.

Labors only failures were not going in hard against John Howard's middle class welfare and not being firm enough with the big miners.

Commenter

Uncle Quentin

Date and time

May 21, 2014, 6:33AM

In opposing a number of budget measures, Labor has been wise not to focus on the PPL, as it would allow Abbott to dump the policy but blame the Opposition. It was always bad policy and probably the reason some of the other budget measures were overly harsh. However, Ross Gittins' article unfairly (IMO) throws in the petrol excise and lowering means testing on family tax benefit B as poor, or perhaps unfair, policy. I strongly disagree, particularly as FTB B represents all that is unnecessary about middle class welfare when capped at its current $150K. Apparently, I must also be rich because I fully support a rise in the GST rate, so long as the less well off are appropriately compensated. It is surprising and irresponsible for Ross to seemingly dismiss a GST rise so easily, without even supporting a discussion on its pros and cons. Populism is obviously not just limited to politics.

Commenter

Flanders

Date and time

May 21, 2014, 6:34AM

@ian & @kingstondude

If LNP/Abbott/Hockey were fair and removed corporate welfare first, tax super superannuation, there wouldn't be a need for such harsh policies on the poor.

Not sure why repealing the Labour governments rule that company cars had to keep a log book and not just hold their hand on their heart and say they are doing the truth. was applauded as such a good thing.

Why do unemployed have to wait the first 6 months ??? I can only see crime increasing by this.

We had universal health, we still do, there is no reason to get rid of it. look at america they are trying to get it back. Look at the extra cost of medicine there.

market forces, yeah right sell off all the government assests so a private corporation can somehow sell it back to us cheaper.. when has they ever happened, there is no reason for them to sell it back cheaper. Infact they would be a bad company if they didn't try and maximise their profits. which means less pay for their staff, more profit for the wealthy

Commenter

KS

Location

Sydney

Date and time

May 21, 2014, 6:43AM

To Ian of Fremantle,

"Half baked solutions leading to loss of life"!! The loss of life was caused by dodgy contractors. Maybe you don't realise it or choose to ignore the fact that many more people die in mining accidents each year. Why don't we have a royal commission into mining accidents?

Commenter

Leonard

Location

Brisbane

Date and time

May 21, 2014, 6:46AM

Most leading economists? What- your mates at the pub?

Mate - open your eyes and read a little because you're fundamentally incorrect in every sense.

Commenter

Say what Ian?

Date and time

May 21, 2014, 6:49AM

The point that Ross made Ian and Kinstondude is that the cuts to the rich are short term and the poor take the real hits, via health, pensions and education. Super and negative gearing weren't touched. There is no vision apart from leave the rich alone and let the poor pay. even the working poor will be affected because they are more likely to have a family member unemploy who they will now have to support on their low wages. How much quicker would the deficit vanish if these are implimented? A damn sight quicker i'd imagine.

Commenter

outraged

Location

parts unknown

Date and time

May 21, 2014, 6:53AM

The high income tax levy I will pay equates to 1 percent of my salary. It will come out of my discretionary spending on luxury items and to be honest I will not notice it. Compare this to someone earning around 25 percent of my income with young school age children. That person loses around 5 to 10 percent most of which will be from their non discretionary spending.

As a high income earner, I have far more to lose from this budget than my 1 percent when Australia becomes a less caring country. The previous Labor government brought down a budget that was taking us to surplus in a manner that created a country that I want to live in.